Bank offer has strings attached

Today we'll examine a credit card option that banks say will protect you from calamitous circumstances, such as losing your job or becoming disabled, but that consumer advocates say could be a waste of money.
We'll also look at the perennial hazard of getting signed up for something you never intended to sign up for -- a recurring problem for people who don't (or can't) read and understand the fine print of many offers.
Carmel resident Carol Bergere, 61, had a run-in with this problem the other day when an envelope arrived in the mail from JPMorgan Chase, which has issued plastic to her and more than 100 million other consumers.
As it happens, Bergere wasn't around when the mail was delivered. But her 60-year-old husband, a former attorney who suffers from dementia, was.
He opened the envelope from Chase and found, pleasantly enough, a check for $20. So what did he do? He made his way to the local Wells Fargo branch and promptly deposited the check into the family account.
Bergere returned home later to find the promo letter that had accompanied the check. It disclosed that by accepting the $20, her husband was actually enrolling in something called the Chase Payment Protector Plan.
"This is why we tell our kids not to talk to strangers," Bergere said. "They're offering candy to get you into the program. But once you're in, you could end up paying money you didn't think you'd be paying."
Like similar programs offered by other leading card issuers, the Chase plan is an insurance offer that allows cardholders to defer payments for up to two years if trouble should arise.
The cost is 89 cents for every $100 in outstanding balance, automatically deducted each month from your plastic.
According to the Federal Reserve, nearly half of all U.S. households now carry a credit card balance from month to month, with the average amount owed running $5,100.
Under Chase's insurance plan, this would result in a monthly payment of about $45, or $540 a year. This appears to be the priciest cost of all leading card issuers.
Bank of America and Wells Fargo each charge 79 cents per $100 in balance owed. But both banks' insurance plans are good for just 12 months of payment deferrals.
Citibank charges 85 cents per $100 in balance for up to two years of deferred payments.
Jessica Iben, a Chase spokeswoman, said the insurance is intended to help consumers through difficult times.
"It adds an extra security precaution," she said. "If something unexpected comes up, you're protected."
The Internet is bristling with complaints from people who say they found themselves enrolled in Chase's Payment Protector Plan without first giving permission.
Iben responded that the bank doesn't operate this way. "We would never sign someone up for something they didn't authorize," she said.
'Totally deceptive'
Be that as it may, consumer advocates say people can easily get caught in unwanted (and costly) programs due to the way many such things are marketed.
"Sending people a check is a totally deceptive way to sell a product," said Linda Sherry, a spokeswoman for Consumer Action. "If you want to sell a product, send a nice brochure explaining why it's a good deal. You shouldn't have to trick people into buying it."
Because of his illness, Bergere's husband is easily fooled by aggressive marketing. But Sherry said the enrollment-by-check approach has proven highly effective as well on consumers who don't have dementia.
Senior citizens and others on a fixed income often find themselves signed up for programs they didn't intend to join, she said.
The Consumer Federation of America estimates that people pay about $6 billion annually for various types of credit insurance, including for credit card payments.
The organization says the "loss ratio" for credit insurance -- the amount paid in monthly premiums versus the amount paid out in claims -- is well below industry averages for other forms of coverage.
The loss ratio of car insurance, for example, historically runs about 65 percent, or 65 cents received in claims for every dollar in premiums paid.
In a 2001 study, the Consumer Federation found that the loss ratio for credit insurance is closer to 34 percent, or 34 cents on the dollar.
"By almost every measure, consumers are paying far too much for credit insurance," said Travis Plunkett, the group's legislative director. "The research shows very clearly that credit insurance is a very bad value."
(For regulatory reasons, many lenders are replacing credit insurance with so-called debt suspension agreements. From the consumer's perspective, the two are virtually identical. The key difference is that credit insurance is overseen by state authorities; the feds look after debt suspension agreements.)
Money in the bank
For card issuers, credit insurance can be a hugely profitable sideline. "It's extremely lucrative for the insurers, much more so than other types of insurance," Plunkett said.
Sherry at Consumer Action said this explains why companies like Chase would actually pay people $20 to sign up for the coverage. "It's worth it for the companies over the long run," she said.
As an alternative, both she and Plunkett recommend that consumers sock away extra cash into a savings account or money market fund.
This way, they can have some money set aside to immediately pay down credit card debt should trouble arise, instead of paying premiums each month just to put off making card payments.
"There are so many better things you can do with $45 a month than some pie-in-the-sky insurance product," Sherry said. "You're much better off paying the money to your balance. That's a really good way to bring it under control."